The yuan’s recent surge amid escalating trade tensions between China and the United States has made Julia Su very jittery.

Her company, Shanghai Eastern Resources Arts & Crafts, exports US$40 million worth of Christmas decorations and ornaments to the US and Europe each year. Although her products are not yet directly affected, the widening scope of punitive tariffs as the world’s largest economies edge closer to all-out trade war are enough to give her some sleepless nights.

“It has dealt us a heavy blow,” said Su, who has been in the business for 20 years. “A dramatic rise in yuan’s value certainly results in a proportional loss to us since we collect US dollars from our clients.

“We hadn’t expected that trade frictions would escalate at such a pace.”

We hadn’t expected that trade frictions would escalate at such a pace

Chinese exporter Julia Su

What’s worse for Chinese exporters, a stronger yuan makes their overseas shipments more expensive, forcing them to slash prices on their products to stay competitive.

But they hadn’t foreseen the growing Sino-US trade frictions which are starting to take a toll on Chinese businesses that had already seen their profit margins squeezed over the past year.

“A 1 per cent rise in the yuan’s value naturally leads to a 1 per cent reduction of prices in my goods,” said Bob Li, owner of Jiaxing Boya Leather Bag, which sells its products in the US and Europe. “Foreign clients would otherwise turn to my competitors in Southeast Asia. I now feel really worried about my business.”

The tit-for-tat tariff proposals from each side have been stacking up on an almost daily basis.

Thursday saw Donald Trump order his trade officials to examine the possibility of new tariffs on US$100 billion worth of Chinese imports.

That was in retaliation to Beijing’s announcement on Wednesday that it would impose additional fees of 25 per cent on 106 American products including soybeans and cars, valued at US$50 billion.

That, in turn, came within hours of the US Trade Representative Office releasing details of Chinese imports worth about US$50 billion on which it planned to slap a 25 per cent punitive tariff.

Chinese steelmakers, one of the main victims of Washington’s trade assault, are “in a chorus of howls,” according to an official with China Baowu Steel Group, the world’s second-largest producer of the metal.

Speaking on condition of anonymity, he said the new 25 per cent levy is particularly painful because almost a tenth of the country’s steel output, about 75 million tonnes, are shipped abroad.

Theoretically, a currency will face downward pressure if a trade war causes its trade surplus to narrow.

US President Donald Trump has demanded that China cut its surplus with his country by US$100 billion a year, but China’s vice-minister for commerce, Wang Shouwen, said this was “unacceptable”.

The spiralling trade tensions are a significant factor behind the strengthening of the yuan and “there are similarities” between China now and Japan in 1985, Citic Securities said in a research note last week.

And that is a particular worry for many Chinese exporters as it raises the spectre of the Plaza Accord signed by Japan more than three decades ago.

The agreement, signed in 1985 to weaken the US dollar against the yen, led to a sharp rise in the Japanese currency and helped trim its trade surplus.

There are mounting worries among export-reliant businesses that Beijing could be driven to repeat Japan’s action of three decades ago.

But E Yongjian, a senior researcher at Bank of Communications in Shanghai, said he didn’t believe China would follow in Japan’s footsteps. He thinks the recent spike in the yuan may be short-lived.

“Instead of further strengthening, an escalating trade war would put yuan under depreciation pressure because serious US trade actions against Chinese exports will mean less trade surplus for China and thus lead to a weaker yuan,” he said. “When the trade war ends, the yuan will remain stable.”

When the trade war ends, the yuan will remain stable

E Yongjian, Bank of Communications in Shanghai

Wang Chunying, head of the international payments department at the State Administration of Foreign Exchange, said the yuan had entered a “stage of two-way fluctuations.”

She added that purchases of foreign currencies should be based on real demand rather than speculation on the yuan’s future movement.

Some individual speculators and firms engaging with export-import businesses, betting on a weakening yuan in the near future, have been actively buying US dollars and other currencies in an attempt to chase short-term gains.

“You can expect the yuan to weaken soon now that it is near the 6.2 level,” said Huang Weijian, a Shanghai resident who recently bought US$5,000 amid the yuan’s appreciation. “The yuan is already expensive and I bought some dollars now which can be used in the future for overseas tours or my son’s education abroad.”

Mainland markets have been closed for the Ching Ming Festival holiday since Thursday. Offshore yuan weakened 0.5 per cent against the dollar earlier in the week, and traded slightly above 6.3 on Friday.

It was the dollar’s biggest weekly gain against the yuan in six weeks.

Analysts had expected the yuan to fluctuate between 6.25 and 6.35 against the greenback this year.

China’s foreign-exchange regulator has warned residents and companies not to “gamble” on the yuan’s exchange rate in light of the strong gains.

Data from the mainland’s public companies offers a further glimpse into the stronger yuan’s impact on Chinese firms.

It has taken a toll on businesses with strong exports, but benefited those with heavy loans denominated in foreign currencies.

In February, Guangdong Goworld, a supplier to Apple, said in a stock exchange filing that it had suffered an estimated forex loss of 45 million yuan (US$7.2 million) in January owing to a stronger yuan.

The January figure alone was equal to 94 per cent of its exchange losses for the first three quarters of 2017. It also translated into 34 per cent of its net profits in the first nine months of last year.

The Shenzhen-listed company manufactures and sells printed circuit boards, liquid crystal displays (LCDs) and ultrasonic electronic measuring instruments to developed markets including the US, Europe, Australia and Japan.

Air China, one of the nation’s major carriers, said in its 2017 annual report in late March that a 1 per cent gain in the yuan against the greenback can boost its net profits by about 280 million yuan as it helps save costs on aviation oil.

Business owners like me have no power or resources to safeguard our own interests. That’s really sad

Bob Li, owner, Jiaxing Boya Leather Bag

Wang Youxin, a researcher at BOC Institute of International Finance, said businesses could use financial derivatives as a hedge against forex losses.

And companies that have both import and export businesses can use the US dollar to buy more products overseas as an additional hedge.

Still, he said bigger companies are in a better position to balance their forex losses, no matter what method they use.

“It can be hard for exports-oriented small businesses to resort to such measures,” he said.

“A stronger yuan in the long term can benefit China by adding global appeal to the local currency and propelling its international use.”

That comes as little reassurance for small exporters, who harbour genuine fears that any further appreciation of the yuan could jeopardise their businesses completely.

“If the yuan really was to hit the 6.2 mark one day, most exports will be in danger,” said Li of Jiaxing Boya.

“Top state leaders are clashing against each other in their nations’ interests,” he said. “But business owners like me have no power or resources to safeguard our own interests. That’s really sad.”